Sheila McNulty Valero gives lift to biofuels

Valero Energy, the US’s biggest independent refiner, has signed a five-year deal to buy biodiesel from Mission NewEnergy, an Australian-listed biodiesel refiner. The agreement, worth up to $3.5bn, also gives Valero the right to buy up to 25 per cent of Mission at A$0.45 per common share, representing a 61 per cent premium to the current 30-day price. Mission’s share price closed at A$0.33 on December 8.

The biodiesel sector has been among the big victims of the credit crisis, with companies unwilling to lend to or buy into a new and unproven fuel given the uncertainty of returns. That Valero is making this investment could signal renewed interest in this segment. Particularly after the US government said it had picked 19 biorefinery projects to receive up to $564m to accelerate the construction and operation of pilot, demonstration and commercial scale biorefinery facilities.

In the second quarter of 2010, Mission is to begin supplying Valero up to 200,000 tonnes (60m gallons) of biodiesel a year. Valero can double that amount to 400,000 tonnes a year and extend the term by an additional five years. The agreement represents gross revenue potential to Mission of more than US$3.5bn, based on prevailing market prices, maximum volume and contract life.

Mission will begin by supplying biodiesel from palm oil. But it is one of the world’s biggest Jatropha plantation companies by acreage, and it plans to eventually supply the fuel from Jatropha feedstock. This is the kind of feedstock the world needs to hone in on. Jatropha is an inedible perennial oil seed plant that grows on marginal soil without displacing agricultural land used for food supply, making it an ecologically responsible source of fuel oil. As Mission’s available stock of Jatropha matures to scale, Mission will supply Valero with palm oil-based biodiesel.

The agreement follows a year of discussions and detailed testing of Mission produced palm- and Jatropha-based biodiesel in Valero’s US laboratories.  If Valero is willing to put this kind of money behind the deal, the fuel source must be a good one.

Valero did not issue its own release on the deal, though it told FT Energy Source the agreement is one in a series of deals and investments Valero has made in alternative and renewable fuels companies. Indeed, in March Valero won a bankruptcy auction for seven VeraSun Energy ethanol production plants and one development site for $477m, which valued the assets at about 40 per cent of replacement cost.

The reality is that as the world drones on about getting away from fossil fuels, Valero, who spends its days processing them, must come up with an alternate fuel source to secure its future. Particularly if impending carbon legislation is as bad for refiners as analysts are predicting.